The FirstGroup (LSE:FGP) share price has soared by more than 40% since the beginning of the year. So dividend yields for the bus and train operator have slipped sharply, based on City forecasts.
For this financial year (to March 2024) the FTSE 250 firm carries a handy-if-unspectacular 2.8% dividend yield. For next year the reading moves to 3.2%.
Clearly those dividend yields aren’t the biggest that investors can currently enjoy. But the rapid rate at which shareholder payouts are tipped to rise suggests the company could still be a great buy for passive income.
But how realistic are current dividend forecasts? And do the possible rewards of owning FirstGroup shares outweigh the risks?
Rapid dividend growth
Dividends at the transport business returned in financial 2022 as it got its debt problems under control and passengers returned following the pandemic. It paid a 1.1p per share reward back then, and further progress last year saw it hike payouts to 3.8p.
Dividend growth is tipped to slow down from these electrifying levels. But pace at which they are tipped to increase remains impressive.
A 4p per share dividend is expected for the current 12-months, up 5% year on year. In the following two years, payouts are tipped to soar 15% and 17% respectively, to 4.6p and 5.4p.
I believe there’s a great chance FirstGroup shares will produce the dividends City analysts are predicting too. Dividend cover ranges between 2.6 times and 3 times through the next three years. A reminder that any reading above 2 times provides a wide margin of safety.
As I’ve said, the company has worked hard to repair its balance sheet, delivered through a combination of disposals and impressive cost-cutting. And this could give it extra financial ammunition to again raise dividends sharply over the short-to-medium term.
It ended the last financial year with adjusted net cash of £109.9m. And last month it announced plans to repurchase an additional £115m worth of shares using proceeds from disposals in North America. It had already launched a £75m share buyback programme in December.
Moving on
So is now to buy FirstGroup shares? Well the direction of travel from the lows of the pandemic has clearly been impressive. And the business is confident it can keep this momentum going.
It’s investing in its bus fleet in areas like electrification. It’s also pursuing growth opportunities across its rail operations.
However, as an potential investor there are still certain things that concern me. The constant threat of earnings-crippling industrial action is one. So is the withdrawal of key contracts (FirstGroup had its TransPennine Express franchise rescinded by the government for poor performance earlier this year).
Finally, I’m also wary that passenger numbers may struggle to reach pre-pandemic levels as home working becomes more common. I will continue to watch FirstGroup shares closely. But, right now, I’d rather spend my money on other UK dividend shares.
